The Securities Industry and Financial Markets Association (SIFMA) has weighed in on an appeal to a case against Fidelity Management Trust Company over the management and monitoring of a stable value fund offered to 401(k) plans.

In an amicus brief filed with the 1st U.S. Circuit Court of Appeals, SIFMA says it has a strong interest, on behalf of its members, in clarifying the fiduciary obligations of investment managers in selecting and managing investment options in retirement plans governed by the Employee Retirement Income Security Act (ERISA).

The lawsuit, which accused Fidelity of engaging in imprudent investment strategies for the Fidelity Group Employee Benefit Plan Managed Income Portfolio Commingled Pool (MIP), a stable value fund offered as an investment option in some 401(k) plans for which Fidelity was trustee, was dismissed by a district court in June.

In its brief, SIFMA notes that a stable value fund is a conservative investment option that is designed primarily to provide stability, as opposed to growth. It points out that the plaintiffs do not claim that the portfolio failed to achieve its desired stability, nor that it lost value, but they claim that, in the immediate aftermath of the 2008 financial crisis, Fidelity was obligated by ERISA to invest the portfolio in riskier, longer-term assets in pursuit of greater yield. “Plaintiffs’ theories—if endorsed by a court—would prove deeply problematic to the financial services industry and to the ERISA plans that it serves,” SIFMA says. “With the benefit of hindsight, it will always be possible to observe that, during any given period, more risk in particular segments was either rewarded or punished. At the point of decision, however, asset managers lack the benefit of hindsight. Courts have rightly refused to credit claims, like this one, that rely, inextricably, on hindsight.”

Rather than evaluating ERISA prudence claims on performance—which is inherently a hindsight assessment—courts should focus on whether the manager engaged in a prudent process, SIFMA argues. It notes that the Labor Department’s regulations obligate fiduciaries to engage in a deliberative process in which they probe key issues pertaining to their investment duties and make determinations based on their evidence-based assessments. SIFMA says Fidelity did just that—repeatedly assessing, for example, how best to maintain wrap coverage while wrap providers were exiting the market, and challenging, for example, whether another benchmark might prove more effective. It says plaintiffs’ argument that a lack of unanimity among Fidelity’s decisionmakers shows there is a real issue. “Internal debates and disagreements on tough issues are evidence of sound fiduciary processes—not evidence of fiduciary shortcomings,” the association wrote in its brief.

No need to follow the herd, and aligning interests is good for all

SIFMA also rejected plaintiffs’ theory that Fidelity was wrong to “increase the conservatism” of the portfolio in the aftermath of the 2008 financial crisis because some other stable value fund managers were willing to keep their money in asset-backed securities, mortgage pass-throughs, and lower-rated corporate bonds. SIFMA says to engage in a prudent process, asset managers need not follow the herd, and that asset managers reasonably differentiate their investment offerings from competitor’s funds.

The plaintiffs had argued that Fidelity acted in its own self-interest by agreeing to overly stringent wrap insurance guidelines that sacrificed the competitiveness of the portfolio, while allowing Fidelity to grow its assets under management. Fidelity argued that because the plaintiffs have not disputed that stable value funds need wrap coverage or that Fidelity was facing the potential withdrawal of several of the portfolio’s wrap providers in 2009, to prove a breach of the duty of loyalty, the plaintiffs need to show that the portfolio did not need additional wrap coverage and that the new wrap guidelines to which Fidelity agreed were overly conservative.

In its brief, SIFMA notes that under ERISA, courts have interpreted the duty of loyalty to prohibit adversity between fiduciaries and their beneficiaries but have rejected an expansion of the duty to prohibit fiduciaries from benefitting from their decisions. “Fiduciaries—including asset managers to retirement plans—should be encouraged to align their interests with the interests of plan participants. That is, after all, the norm in the financial services industry,” the association wrote. “Fund managers frequently get paid a fee that is proportional to their assets under management—so if their funds perform well, they will get paid more. Individual asset managers likewise may receive bonuses for exceeding performance targets for the funds that they manage. These practices are desirable, as a rising tide lifts all boats. This Court should be loathe to adopt a rule that would prove impossible to administer, inconsistent with industry norms, and lacking any discernible benefit to plan participants.”